Riassunto analitico
Non-fundamental representations do not convey enough information in order to recover the structural shocks from the reduced-form residuals. We analyse the implications in three strands of literature: news driven business cycle, fiscal foresight and noisy information. Then, we show that small-size VARs are unable to recover a news shock due to information deficiency. Therefore, we find 6 large-dimensional systems able to recover the shock. We deduce that forward looking variables help to amend a non-fundamental representation. Moreover, although agents are able to see an anticipated shock on productivity, they receive noisy information since they adjust their decisions as time passes. We conclude that a news shock has a positive impact effect on consumption, GDP and hours worked and that it is an important source of the business cycle.
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Abstract
Non-fundamental representations do not convey enough information in order to recover the structural shocks from the reduced-form residuals. We analyse the implications in three strands of literature: news driven business cycle, fiscal foresight and noisy information. Then, we show that small-size VARs are unable to recover a news shock due to information deficiency. Therefore, we find 6 large-dimensional systems able to recover the shock. We deduce that forward looking variables help to amend a non-fundamental representation. Moreover, although agents are able to see an anticipated shock on productivity, they receive noisy information since they adjust their decisions as time passes. We conclude that a news shock has a positive impact effect on consumption, GDP and hours worked and that it is an important source of the business cycle.
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